A liquidity agreement is a written document by which a person can convert his assets into cash, in other word, cash in his assets. For eg, a person who has invested in stocks or debentures can convert that amount to cash. These agreements are more prevalent during financing of venture capital firms where the investors are not sure if the firm will be able to sell its stock in the market or not. Put options are also a form of liquidity agreements, where an investor can force a company to buy back his shares in a previously agreed upon price.
Another type of liquidity agreement is a buy-sell agreement where an investor can liquidate his investment although the management wants to sell its shares. Another common option is convertible debentures which help investors by giving them the option of not converting the debentures into shares of the firm’s common stock in case the company is not doing well.
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